The IRS has released Form 2441 (Child and Dependent Care Expenses) and its accompanying instructions for the 2021 tax year. Taxpayers file Form 2441 with Form 1040 to determine the amount of their available dependent care tax credit (DCTC), and DCAP participants must file it with Form 1040 to support the income exclusion for their DCAP reimbursements. The 2021 form and instructions have been updated, primarily to reflect temporary changes under the American Rescue Plan Act of 2021 (ARPA) and the Consolidated Appropriations Act, 2021 (CAA).
ARPA made temporary changes to the DCTC and DCAP rules. For 2021, the DCTC is refundable for certain taxpayers, and the dollar limit on expenses that can be taken into account is increased from $3,000 to $8,000 for taxpayers with one qualifying individual and from $6,000 to $16,000 for taxpayers with two or more qualifying individuals. The credit’s phaseout schedule for higher earners has also been modified. The maximum amount of DCAP benefits that can be excluded from income is increased from $5,000 to $10,500 for taxable years beginning in 2021 (see our Checkpoint article). (For taxpayers who are married filing separately, the maximum increased from $2,500 to $5,250.) Also, under the CAA, DCAPs may allow carryovers of unused amounts from the 2020 plan year to the 2021 plan year and from the 2021 plan year to the 2022 plan year, or may allow an extended claims period (see our Checkpoint article). In some cases, unused amounts from the 2020 plan year may be carried over into the 2021 plan year if a dependent turned 13 before the funds were exhausted.
The 2021 form has been revised to include an attestation of eligibility for the refundable DCTC; the phaseout schedule for qualified expenses incurred and paid in 2021 that are considered in determining the 2021 credit; separate reporting of the credit for 2020 expenses paid in 2021; and separate lines for refundable and nonrefundable credit amounts. The DCAP portion of the 2021 form reflects the increased maximum DCAP reimbursement amounts and requires disclosure of DCAP amounts forfeited or carried over. The form also includes a new checkbox to indicate if the dependent care provider is the taxpayer’s household employee. The instructions include detailed information on the temporary changes and guidance on completing the applicable sections of the form.
EBIA Comment: DCAP participants—especially those who also claim the DCTC—will need to be mindful of the changes to Form 2441 as they prepare their federal tax returns. The expenses that can be used to calculate the DCTC are reduced by the amount of any DCAP reimbursements for the year. Employers should anticipate questions from employees about the complicated and overlapping forms of temporary relief. For more information, see EBIA’s Cafeteria Plans manual at Sections XVI.N (“Temporary COVID-19-Related Relief for Cafeteria Plans, Health FSAs, and DCAPs”), XXIII.C (“DCAP Participation vs. Claiming the Dependent Care Tax Credit”), and XXV.H (“Form 2441—Employees Must File It With Their Form 1040”).
Contributing Editors: EBIA Staff.